Goldman Sachs Sees Bright Side in AI Stock Dip Amid Rate Cut Expectations

Artificial intelligence (AI) stocks have recently faced significant setbacks. However, Goldman Sachs' trading department suggests that the current downturn offers a strategic buying opportunity, as interest rates are expected to decline, and the underlying fundamentals remain strong.

“We anticipate lower interest rates will bolster IT projects, reduce post-election economic policy uncertainties, and the tangible progress of AI products will be demonstrated at upcoming conferences,” Goldman Sachs' Vice President of the U.S. Custom Baskets team, Faris Mourad, indicated in a recent client report.

The Broad AI basket, which includes prominent firms like NVIDIA, Microsoft, Apple, Alphabet Inc., Amazon, Meta Platforms Inc., and Oracle, has dropped 11% from its peak on July 10, 2024. Not only have the "big seven" seen declines, but other stocks have also been affected. Earlier this year, Goldman introduced two baskets focusing on data center demand and power requirements for AI. However, since mid-July, the AI data center basket fell by 8%, and the Power Up America basket decreased by 5%.

Traders were anticipating a 50 basis point rate cut by the Federal Reserve at the meeting concluding on Wednesday, prompting a shift from large tech stocks to sectors more sensitive to economic changes. Additionally, the recent earnings season revealed that returns from AI investments did not meet investors' expectations.

Despite some investors' concerns, Goldman Sachs sees this as an entry point. “The pessimism around AI is overdone,” Mourad noted. “The AI basket is attractively priced relative to this year's earnings trends, and without new negative developments, further declines are unlikely.”

Fundamental factors play a crucial role in Goldman's outlook. The firm predicts that AI companies' net profits will double over the next 12 months and anticipates further growth in power generation linked to the technology.

“The strong performance of the power theme this year is primarily due to earnings growth in the sector. Independent power producers and regulated utility companies provided positive data center information in the last earnings season,” Mourad remarked.

“We continue to believe that data centers are the single largest driver of power demand growth in the U.S.,” Mourad added.